Topic 3

Procurement
And
Purchasing
Process

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LEARNING
OUTCOMES
At the end of this lecture, students should be able to
understand the:

1. Overview of procurement and purchasing process.

2. Types of purchasing.

3. Steps involved in the purchasing process.

4. E-procurement and its benefits.

5. Landing costs.

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Purchasing Process
 Purchasing is a formal process of buying goods and services.

 The process can vary from one organisation to another.

 Usually starts with a demand or requirement.

 Could be for physical items (inventory) or service.

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Types of Purchasing

1. Personal purchases

The consumer purchases for the consumption of themselves.

2. Commercial purchase

Facilitated by middlemen for the intention of re-sale to meet

others requirements. Agents, wholesalers and retailers come

under this category providing their own channels of

distribution to the consumer.

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Types of Purchasing

3. Industrial purchasing

The purchaser is buying to convert material into finished

goods and product. It entails buying raw materials. Components,

supplies and consumable stores, spares and tools, machines and

equipment and office appliance.

4. Institutionalized or government purchasing

Government agencies or institutions are very important, critical, they

purchase in bulk for public utilities. The government purchase is a

purchase where the government institutions buy public utilities in bulk.

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Steps Involved in Purchasing
Process
Common steps involved are:

 Step 1: Identifying problem

 Step 2: General need description

 Step 3: Product specification

 Step 4: Supplier search

 Step 5: Request for proposals

 Step 6: Supplier selection

 Step 7: Order specification

 Step 8: Performance review 6

Step 1: A problem is identified

 Can be initiated by the employee

 What is needed by the organisation?

 Identify the need The purchasing process

begins when the business recognizes that

they have a need for a product, tool or

service that will enhance their

operations. . 7
Step 2: General need description

Which product or service is required

 Printing paper

 Photocopier

 Training for staff development

 Raw materials for production

 Products for resale

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Step 3: Product specification

Once the general need is agreed upon by those who have

purchasing authority in that organization, they will then

narrow down the options by specifying what the product or

service must offer.

 Quantity

 Quality

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Step 4: Supplier search

 Looking for potential suppliers.

 If the company doesn't already have an established

relationship with a vendor that offers the product,

then often the company must look online, attend

trade shows or contact suppliers by telephone.

 If the suppliers are reputable, financially stable and if

they'll be around for future requirements.

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Step 5: Request for proposals

 For large purchases, organizations usually

write out a formal RFP, a Request for

Proposal, and then send it to their

preferred suppliers.

 Make the process public so that anyone

can send in a proposal.

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Step 6: Supplier selection
 Supplier proposals and prices are evaluated to
determine who is offering the best price and the best
quality.

Step 7: Order specification

 After the purchaser has selected the winning supplier,
orders are placed.
 This may involve establishing credit with the supplier,
agreeing on terms, as well as reviewing shipment times
and any other deliverables that may come with the sale,
such as installation or product training.

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Step 8: Performance review
 Once the product has been delivered or the service has
been performed, the organization will review the
purchase to see if it meets acceptable standards.

 For larger purchases, this could be a formal review

involving key decision makers in the organization and
the supplier's sales staff.

 Small purchases – review may be informal

Example, if the product arrived late or was damaged,
company may decide not to buy from the supplier
again.

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E- Procurement or Electronic
Procurement
 Is a fully capable electronic web application for purchasing goods
and services. It allows shoppers to browse online catalogs, add
items to a shopping cart and submit the requisition electronically.

 Is the process of requisitioning, ordering and purchasing goods and

services online. It is a business-to-business process.

 The goal of using an e-procurement system is to acquire products

or services at the best possible price and at the best possible time.

 E-procurement applications allow the procurement office to

manage purchases. They can also do the following:

 search through online catalogs;

 select the desired items that match the organization's
parameters for cost, quality and supplier;
 submit requisitions; and
 track delivery status.

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Benefits of E-procurement
 E-procurement helps automate the procurement process. Centralized
transaction tracking, simplified reporting and contract compliance helps
reduce delivery times and shorten procurement cycles.

 Automated systems and built-in monitoring tools reduce the overhead for
procurement teams, optimize performance, increase process efficiency and
achieve cost savings.

 With e-procurement, companies have access to a larger selection of products

and services to meet their specific needs. The ability to quickly locate
products from their preferred suppliers or vendors helps control inventory size
and costs.

 Since the procurement department is freed from manual, repetitive or low-

value tasks, it can redirect resources to higher value activities, such as
contract negotiations.

 E-procurement also delivers better reporting of procurement trends and

metrics, and increases visibility into enterprise procurement spending. Since
all information is centralized, company management or stakeholders can
easily access it to improve decision-making. It thus increases process
transparency and accountability and enables better control over the
procurement function.

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Challenges of E-procurement
 Implementing an e-procurement application comes with
potential challenges, particularly around installing and
integrating the software with other enterprise back-end
systems.

 Training employees to use it is another challenge.

Additionally, companies must work with suppliers to
ensure a smooth transition to the new online system.

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Landing Cost
 Landed cost is the total price of a product or shipment
once it has arrived at a buyer’s doorstep.

 The landed cost includes the original price of i.e

product, transportation fees (both inland and ocean),
customs, duties, taxes, tariffs, insurance, currency
conversion, crating, handling and payment fees.

 Freight and shipping are two terms that are

interconnected. Both shipping and freight are the
transportation of goods either by air, land, or sea.

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Landing Cost – Example

Facts for 100 widgets received as part of a

shipment:

Supplier cost: $25 per unit

Duty applicable at 2%

Freight cost for the entire shipment was $1,200 –

and the widgets represent one quarter of the

shipment by cube
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Freight cost

 Freight expense/ cost refers to the price that is

charged by a carrier for sending out cargo from

the source location to the destination location.

 The expense is paid by the person who wants the

goods transported from one location to another.

 The amount of freight expense charged depends

on the mode of transportation used to deliver the

cargo. 19
Procurement and purchasing
Most of the organisations use these terms interchangeably.

 Procurement – deals with the sourcing activities, negotiation

and strategic selection of goods and services that are usually

of importance to an organization. Is the process of selecting

vendors, establishing payment terms, strategic vetting,

selection, the negotiation of contracts and actual purchasing

of goods.

 Purchasing - the process of how goods and services are

ordered. Is a subset of procurement and often includes

receiving and payment as well.

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Procurement and purchasing

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Requisition vs. Purchase Order
Purchase requisitions and purchase orders are key documents in
the process of acquiring items your business needs to operate,
standardizing the process of ordering internally and externally.

Purchase Requisition
 A form that an internal department of your company, such as
the mailroom, submits to your company's purchasing
department listing items it wants the purchasing department to
order from an outside vendor.

Purchase order
 Once the purchasing department of a business has approved the
purchase requisition, it issues a purchase order to the outside
vendor of the requested goods, initiating the sales transaction.
 Purchase orders should include certain information, such as the
name of the purchasing office, the items being purchased, the
ship-to address, the payment terms, invoicing instructions and
the purchase order number.
 To assist in record keeping, purchase orders typically have the
same number as the associated purchase requisition.

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Selecting Suppliers

Choosing the right supplier involves more than just

scanning a series of price lists.

1. Reliability

2. Quality

3. Value for money

4. Strong service and clear communication

5. Financial security

6. A partnership approach

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Reference
https://kissflow.com/procurement
/procurement-vs-purchasing/
https://www.marketing91.com/pu
rchasing-process/
https://www.indeed.com/career-a
dvice/career-development/purcha
se-process#:~:text=Steps%20in
%20the%20purchasing%20proce
ss%201%201.%20Identify,order
%20...%208%208.%20Review%2
0supplier%20performance%20
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